Digging for the root causes of Nigeria’s problems
The election of Goodluck Jonathan last April ushered in plenty of optimism. With his pledges of sweeping economic reforms, Nigeria’s new president seemed determined to unleash his country’s greatest potential: that of a nation endowed with vast resources; Africa’s largest population; and a strong market for goods and services. Finally there was a pilot capable of presiding over Nigeria’s long awaited take-off.
But more than 6 months on, we’re still on the ground. Or, judging by the government’s last bond auction, we’re still too high in the sky: Nigeria currently pays an eye-watering 16.5 per cent on its 7-year sovereign bonds. This is better than the 18 per cent it paid in October, but even if we adjust the rate for inflation (these rates are in local currency), it ain’t cheap. Clearly investors are not yet showing full confidence in Nigeria’s economy.
It’s not that Mr Jonathan has taken a back seat. Taking advantage of the international credit he won by winning the elections, he’s managed to gather a ‘dream team’ at the helm of Nigeria’s economic affairs - the latest member of which is Ngozi Okonjo-Iweala, former Managing Director of the World Bank, now acting as finance and economy super-minister. And the team is making progress: last month it created Nigeria’s first sovereign wealth fund, aiming to make better use of the country’s vast oil revenues; it has pledged to struggle against inflation; and it seems committed to generating jobs and sustainable growth. What’s more, Nigeria’s GDP continues to gallop ahead at 7 per cent, while the rest of the world tips towards recession.
Yet other indicators show that the economy’s not yet taking off. Inflation remains persistently high, at 10.5 per cent in September. The Naira, Nigeria’s currency, is off-target and remains highly volatile. Interest rates, at a record-high of 12 per cent since last month, have so far failed to stabilise both. And international reserves have yet to pick up, despite higher oil prices. Worse still, Nigeria’s economy is actually slowing down, from 7.4 per cent growth year on year to 7.2 per cent this quarter.
Are these the symptoms of deeper weaknesses? Probably. Let’s start with the GDP. Admittedly, energy-rich economies are not helped when recession hits their biggest export markets (Nigeria is one of America’s top oil suppliers) as global demand slows. But there is a more structural reason for the country’s disappointing growth: its vast reserves remain underexploited. This is due in part to a deteriorating security climate, which has crippled production and scared off investors. On top of periodic sectarian violence between the Muslim North and Christian South, the sect Boko Haram has launched a series of increasingly daring attacks - even blowing up Abuja’s main UN building in September, killing 23.
But the economy is also limited by the dire state of Nigeria’s power industry. The whole country receives only as much grid power as a mid-size European city, and most Nigerians only a few hours of electricity a day; this creates a bottleneck in Nigeria’s oil and gas production, as well as in the broader economy, further deterring the investment needed to dig deeper into the country’s resources. Yet the power industry’s liberalization, a signature policy of Mr Jonathan, has been postponed from this year to next.
Then there is inflation, and the related problem of shallow foreign reserves. Their common cause is well known: excessive government spending, both at home and abroad. But balancing the books is no simple task. It will require a painful trimming of the bloated public service, in a context where official unemployment reaches a staggering 21 per cent. And most importantly, it will mean scrapping the expensive fuel subsidy. Nigeria, despite being the 8th largest petroleum exporter in the world, is chronically short of refined fuel - so it spends billions every year buying the stuff on international markets, and retails it for 60 cents a litre at home. Yet, here again, the subsidy removal is facing firm domestic resistance. And with the costly implementation of a minimum wage hike on the cards, more fiscal spending is planned for next year.
The biggest drain on the economy, however, is what remains underground - and under the table. Nigeria’s shadow economy is one of the world’s largest: at 70 per cent of GDP, it is so famously large that Lagos’ pirate film industry has been dubbed ‘Nollywood’. Petrol is continuously smuggled across the border, the black forex market is a platform in itself, and some academics go as far as to claim that underground economy jobs are ‘vital to Nigeria’s development’. Unrecorded and illicit activities not only narrows the government’s tax base; it also makes a mockery of any attempt at serious economic planning.
But most damaging is the under-the-table bit of the underground economy. Corruption, anywhere in the world, is a hindrance to economic development: it diverts government funds away from productive policies, hinders the efficient allocation of capital across investment projects, and deters foreign investment. But in Nigeria, pervasive fraud among officials has even more serious political and social repercussions. A status quo of generalised corruption means that the administration often fails to share gains beyond its close geographical and social circle, thereby exacerbating social fault lines and political tensions. The resulting instability - a recurrent source of violent clashes and armed activism - both scares off potential investors and cripples economic activity. It also makes people suspicious of reforms, which they generally see as a political trick to divert public money (as is the case with the proposed scrapping of fuel subsidies).
All in all, Nigeria’s problems are complex and intractable: whether they’re about better pumping resources from the ground, using the resulting wealth in wiser ways, or making sure the cash lands in the right hands, they all boil down to what goes on below the surface. Now that his electoral honeymoon has ended, it will take Mr Jonathan more than good will - and good luck - to unearth his country’s true potential.